Month: May 2024

There are three “government-sponsored enterprises,” commonly called GSEs, that play a big role in US housing finance: the Federal Home Loan Banks, Fannie Mae, and Freddie Mac. Perhaps the key similarity across all three is that when they borrow money, the financial markets perceive that the federal government is standing behind the loan–and so they can borrow at a lower interest rate. However, the ways in which the GSEs are organized and interact with housing markets is rather different. Most notably, Fannie Mae and Freddie Mac were converted to private companies, with shareholders, which then went broke when housing prices declined in the lead-up to the Great Recession, and have been run by the federal government under a bankruptcy conservatorship since then. However, the Federal Home Loan Banks came through the financial crisis of 2008-09 without requiring any financial support.

For those occasions when it is useful to understand the Federal Home Loan Banks, and how it differs from the other housing-related institutions, the Congressional Budget Office offers some guidance in “The Role of Federal Home Loan Banks in the Financial System (March 2024). From the “At a Glance” overview to the report:

In 1932, lawmakers created a system of Federal Home Loan Banks (FHLBs) as a government-sponsored enterprise (GSE) to support mortgage lending by the banks’ member institutions. The 11 regional FHLBs raise funds by issuing debt and then lend those funds in the form of advances (collateralized loans) to their members—commercial banks, credit unions, insurance companies, and community development financial institutions.

In addition to supporting mortgage lending, FHLBs provide a key source of liquidity, during periods of financial stress, to members that are depository institutions. During such periods, advances can go to institutions with little mortgage lending. Some of those institutions have subsequently failed, but the FHLBs did not bear any of the losses.

FHLBs receive subsidies from two sources because of their GSE status:

• The perception that the federal government backs their debt, often referred to as an implied guarantee, which enhances the perceived credit quality of that debt and thereby reduces FHLBs’ borrowing costs; and
• Regulatory and income tax exemptions that reduce their operating costs.

Federal subsidies to FHLBs are not explicitly appropriated by the Congress in legislation, nor do they appear in the federal budget as outlays. The Congressional Budget Office estimates that in fiscal year 2024, the net government subsidy to the FHLB system will amount to $6.9 billion (the central estimate, with a plausible range of about $5.3 billion to $8.5 billion). That subsidy is net of the FHLBs’ required payments, totaling 10 percent of their net income, to member institutions for affordable housing programs. CBO estimates that in fiscal year 2024, such payments will amount to $350 million.

What is the ownership structure of the FHLB system?

The FHLB system is organized as a cooperative; the individual banks are owned by their members, and FHLBs do not issue publicly traded stock (in contrast to Fannie
Mae and Freddie Mac). One implication is that the system is run for the benefit of its members. The 11 FHLBs are jointly and severally liable for the system’s debt; if any one of them fails, the remaining banks become responsible for its debt.

In dollar terms, what’s the shape of the FHLB system?

As of December 31, 2022, the FHLBs reported assets of $1,247 billion, liabilities of $1,179 billion, and capital (the difference between assets and liabilities) of
$68 billion. Assets included $819 billion in advances, $204 billion of investments, and a $56 billion mortgage portfolio. Liabilities included $1,161 billion of debt.
For calendar year 2022, FHLBs reported net income of $3.2 billion and paid members $1.4 billion in cash and stock dividends. FHLBs’ affordable housing payments that year amounted to $0.4 billion.

What makes the FHLB system so safe, so that it sailed through even the 2008-09 Great Recession?

FHLBs require borrowing members to pledge specific collateral against advances, thus giving the FHLBs priority in receivership over other creditors, including the FDIC [Federal Deposit Insurance Corporation]. Such lending therefore limits the
assets that the FDIC has access to when resolving a failed commercial bank. Moreover, if a commercial bank that is a member institution fails, FHLBs’ advances are paid before the FDIC is paid because the FHLB has a priority claim on collateral. The FDIC is thus exposed to more losses, whereas FHLBs are fully protected. … However, FHLBs face interest rate risk, which is the risk that changes in rates will affect the value of bonds and other securities. FHLBs attempt to limit that risk by
matching the maturities of their assets and liabilities and through other types of hedging. Interest rate risk stemming from mortgage portfolios has contributed to losses by some banks in the past.

How is the FHLB system different from Fannie Mae and Freddie Mac?

[A] large secondary (or resale) mortgage market has developed in which Fannie Mae and Freddie Mac, two other housing GSEs that are now in federal conservatorship, play dominant roles … Fannie Mae and Freddie Mac purchase mortgages from lenders (including members of the regional FHLBs) and
package the loans into mortgage-backed securities that they guarantee and then sell to investors … Today, the primary business of FHLBs still is making
advances to their members.

Why is the FHLB system referred to as the “lender of next-to-last resort”?

During financial crises and other periods of market stress, FHLBs also provide liquidity to member institutions, including those in financial distress. Providing liquidity is one way to protect the financial system from liquidity-driven bank failures. In normal times, however, FHLBs aim to increase the availability of, and lower the rates of, residential mortgages by serving as a source of subsidized funds for financial institutions originating those mortgages. … FHLBs are a “lender of next-to-last resort.” (Banks turn to them before accessing the Federal Reserve’s discount window because borrowing from the window signals that a bank is under stress.)

If we were reinventing the housing finance system today, it seems unlikely to me that we would create the Federal Home Loan Bank system. It’s a long time since 1932. Today, the financing for more than half of all home mortgages doesn’t originate from banks, but instead from “nonbank” financial institutions. But that said, the FHLB system doesn’t cost the government anything directly, it’s part of the network of housing-related finance, and it provides a layer of extra protection as the lender of next-to-last resort for banks under stress. Given that the institution already exists, it feels as if unwinding the $1 trillion-plus in assets would be a substantial task, with limited benefits.

The “15-minute city” is getting some attention from urban planners. The idea is that everyone should be able to access the key destinations in their day-to-day life–work, food, schools, recreation–within a 15-minute walk, bike ride, or mass transit ride of their residence. Cars would then be unnecessary for many daily tasks. Most Americans do not live with the experience of a 15-minute city: for example, the average commute to work, typically by car, is about 25 minutes each way. Here, I’ll sidestep the potential environmental or exercise-related benefits, and instead turn to an interview with Edward Glaeser by the McKinsey Global Institute (“What’s the future for cities in the postpandemic world?” April 17, 2024). When asked about the 15-minute city, Ed responds:

I do, in fact, have views on the 15-minute city. And I certainly applaud the idea that we’re going to have land-use regulations that are such that it’s easy to put residences, and workplaces, and cafés, and stores all in the same neighborhood. There are wonderful things about the 15-minute city, a vision of neighborhoods being full of lots of different amenities. It’s great. The ability for us to have access to lots of things without driving a car, that’s fantastic. But the view that we should basically see ourselves as being citizens of a sort of small neighborhood, rather than citizens of an entire metropolis, that feels deeply dangerous to me, especially in America, with its history of profound racial and income segregation.

Together with Carlo Ratti and a series of other coauthors, we put together a paper looking at, essentially, mobility using cellphones and the 15-minute city. And what we find in the US is actually the more that rich people, elites, live within their 15-minute area, they actually integrate more. So in an elite setting, it’s not a terrible thing. If you’re coming from a poorer area, if you’re an African American, the 15-minute-city experience is one that involves just much more experience segregation for them. And so if you want a city that’s integrated, you want to eschew the 15-minute city. You want to embrace a metropolis-wide vision of the city, not one that focuses on small little neighborhoods.

Glaeser always has interesting comments on the history of urban areas and where they are headed, and I recommend the interview as a whole. Here’s one other thought from him about how segregation within cities, by income and by race, varies between adults and children.

Residential segregation feels like it’s really important in lots of ways. And I think it is very important for children. Segregation has a very powerful effect in explaining differential outcomes for whites and African American kids. But as recent work using cellphone data, by Susan Athey and Matthew Gentzkow and their coauthors have shown, experience segregation for adults can be very different than residential segregation.

In most American cities, you get up in the morning, you leave your segregated neighborhood. You go to an integrated firm. You interact with lots of different people. And so the neighborhood doesn’t matter. But it does matter for kids. Because the kids actually don’t go to work in an integrated company. They go to a segregated school. They play on a segregated street corner. Understanding this feels important to me. I have new work with Cody Cook and Lindsey Currier that tries to differentially look at them, the cellphone mobility patterns of poor kids and rich kids, and just documents how much more of a life that is disconnected from the marvels of urban areas that the kids of poverty experience, even in wealthy cities.

Of course, Glaeser’s argument is not a dispositive or unanswerable argument against the idea of a 15-minute city. But it can be a thin line between the idea that it would be nice if more people could aim to work and carry of many aspects of day-to-day living in walkable neighborhoods around our residences, and the argument that people really should mostly stay in their own 15-minute zones, rather than mixing more widely across our urban areas.

I have been the Managing Editor of the Journal of Economic Perspectives since the first issue in Summer 1987. The JEP is published by the American Economic Association, which decided back in 2011–to my delight–that the journal would be freely available online, from the current issue all the way back to the first issue. You can download individual articles or entire issues, and it is available in various e-reader formats, too. Here, I’ll start with the Table of Contents for the just-released Spring 2024 issue, which in the Taylor household is known as issue #148. Below that are abstracts and direct links for all of the papers. I will probably blog more specifically about some of the papers in the few weeks, as well.

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Symposium: How Research Informs Policy Analysis

“How Economists Could Help Inform Economic and Budget Analysis Used by the US Congress,” Staff of the Congressional Budget Office

The US Congress uses economic and budgetary projections, cost estimates for proposed legislation, and other analyses provided by the Congressional Budget Office (CBO) as part of its legislative process. CBO makes assessments based on an understanding of federal programs and revenue sources, reading the relevant research literature, analysis of data, and consultation with outside experts—and often relies on economic research. This article begins with a discussion of the role of the Congressional Budget Office and then discusses how economists could conduct research that would help inform the Congress by improving the quality of the analysis and parameter estimates that CBO uses. It gives overall context and specific examples in seven areas: credit and insurance, energy and the environment, health, labor, macroeconomics, national security, and taxes and transfers.

Full-Text Access | Supplementary Materials

“The Economic Constitution of the United States,” by Cass R. Sunstein

The United States has an Economic Constitution, governing federal regulation, and explaining how to conduct regulatory impact analysis, with reference to quantification and monetization of the costs and benefits of proposed and final regulations. Known as OMB Circular A-4, the Economic Constitution of the United States was thoroughly revised in 2023, with new directions on behavioral economics and nudging; on discount rates and effects on future generations; on distributional effects and how to account for them; and on benefits and costs that are hard or impossible to quantify. The revised document leaves numerous open questions, involving (for example) the valuation of human life, the valuation of morbidity effects, and the value of the lives of children.

Full-Text Access | Supplementary Materials

“The Financial Crisis Inquiry Commission and Economic Research,” by Wendy Edelberg and Greg Feldberg

Researchers and economic research were essential to the success of the Financial Crisis Inquiry Commission. For example, researchers submitted testimony, briefed commissioners, and spoke with our staff in recorded interviews. They also provided access to key data sources and helped us use them. Although we started our investigation barely one year after the height of the crisis, there was already a strong core of early, empirical research grappling with many of our key questions, such as why investors ran certain markets, why incentive problems pervaded securitization markets, and why risk management failed at so many large companies. We also benefited from the wealth of research exploring developments in financial markets leading up to the crisis. The process to build the research staff on a tight deadline was chaotic, and we needed people willing to work long hours, work on a team, and follow the evidence wherever it took us.

Full-Text Access | Supplementary Materials

“Philanthropic Cause Prioritization,” by Emily Oehlsen

Many foundations decide how much and where to give based on their founders’ personal precommitments to specific issues, geographies, and/or institutions. If a grantmaking organization instead wanted to select problems based on a general measure of impact per dollar spent, how should it approach this goal? What tools could it use to identify promising cause areas (climate change, education, or health, for example) or to compare grants that achieve different results? This paper focuses on an approach followed by the grantmaking organization Open Philanthropy for its “Global Health and Wellbeing” portfolio, with an emphasis on two key frameworks: equalizing marginal philanthropic returns, as well as importance, neglectedness, and tractability. It describes measurement and comparability under the first framework, and then applies the second framework to the example of reducing exposure to lead. It concludes by considering critiques and areas for improvement.

Full-Text Access | Supplementary Materials

The Labor Market and Macroeconomics

“The Shifting Reasons for Beveridge Curve Shifts,” by Gadi Barlevy, R. Jason Faberman, Bart Hobijn and Ayşegül Şahin

We discuss how the relative importance of factors that contribute to movements of the US Beveridge curve has changed from 1959 to 2023. We review these factors in the context of a simple flow analogy used to capture the main insights of search and matching theories of the labor market. Changes in inflow rates, related to demographics, accounted for Beveridge curve shifts between 1959 and 2000. A reduction in matching efficiency, that depressed unemployment outflows, shifted the curve outwards in the wake of the Great Recession. In contrast, the most recent shifts in the Beveridge curve appear driven by changes in the eagerness of workers to switch jobs. Finally, we argue that, while the Beveridge curve is a useful tool for relating unemployment and job openings to inflation, the link between these labor market indicators and inflation depends on whether and why the Beveridge curve shifted. Therefore, a careful examination of the factors underlying movements in the Beveridge curve is essential for drawing policy conclusions from the joint behavior of unemployment and job openings.

Full-Text Access | Supplementary Materials

“Perspectives on the Labor Share,” by Loukas Karabarbounis

As of 2022, the share of US income accruing to labor is at its lowest level since the Great Depression. Updating previous studies with more recent observations, I document the continuing decline of the labor share for the United States, other countries, and various industries. I discuss how changes in technology and product, labor, and capital markets affect the trend of the labor share. I also examine its relationship with other macroeconomic trends, such as rising markups, higher concentration of economic activity, and globalization. I conclude by offering some perspectives on the economic and policy implications of the labor share decline.

Full-Text Access | Supplementary Materials

“Why Labor Supply Matters for Macroeconomics,” by Richard Rogerson

Benchmark models taught in undergraduate macro do not attribute any role for labor supply as an important determinant of macroeconomic outcomes. The first part of this paper documents three facts. First, differences in hours of work across OECD economies are large and imply large differences in GDP per capita. Second, there are large differences in the size of tax and transfer programs across countries, as proxied by differences in government revenues relative to the GDP. Third, these two outcomes are strongly negatively correlated. Taken together, these facts suggest an important role for labor supply in affecting macroeconomic outcomes. I conjecture that the reason why macro textbooks do not include a discussion of labor supply stems from a belief that labor supply elasticities are sufficiently small that even large differences in work incentives do not generate important macroeconomic effects. The second part of this paper argues that this belief is based on incorrect inference linking small elasticities for prime age male to small aggregate labor supply elasticities. The role of labor supply at the extensive margin plays a critical role in understanding this mistake in this inference.

Full-Text Access | Supplementary Materials

“How Cyclical Is the User Cost of Labor?” by Marianna Kudlyak

In employment relationships, a wage is an installment payment on an implicit long-term agreement between a worker and a firm. The price of labor that impacts firm’s hiring decisions, instead, reflects the hiring wage as well as the impact of economic conditions at the time of hiring on future wages. Measured by the labor’s user cost, the price of labor is substantially more pro-cyclical than the new-hire wage or the average wage. The strong procyclicality of the price of labor calls for other forces for cyclical labor demand to explain employment fluctuations.

Full-Text Access | Supplementary Materials

Privacy Protection and Government Data

“Government Data of the People, by the People, for the People: Navigating Citizen Privacy Concerns,” by Claire McKay Bowen

The data privacy community generally agrees that government data should be more widely accessible, especially being of the people (data collected about them), by the people (collected and supported using taxpayer dollars), and for the people (providing public and social good). But what to protect in that data and how to do so are highly and intensely debated. This paper discusses the fundamental tradeoff between data privacy and data usefulness—and how determining an appropriate balance can be difficult. The paper also provides thoughts on what must be addressed to help shape the future of data privacy, make meaningful contributions to its policy debates, and ensure the responsible representation of people in data.

Full-Text Access | Supplementary Materials

“When Privacy Protection Goes Wrong: How and Why the 2020 Census Confidentiality Program Failed,” by Steven Ruggles

The US Census Bureau implemented a new disclosure control strategy for the 2020 Census that adds deliberate error to every population statistic for every geographic unit smaller than a state, including metropolitan areas, cities, and counties. This article traces the evolving rationale for the new procedures and assesses the impact of the 2020 disclosure control on data quality. The Census Bureau argues that the traditional disclosure controls used for the 2010 and earlier censuses revealed the confidential responses of millions of Americans. I argue that this claim is unsupported, and that there is no evidence that anyone’s responses were compromised. The new disclosure control strategies introduce unnecessary error with no clear benefit; in fact, the new procedures may actually be less effective for protecting confidentiality than the procedures they replaced. I conclude with recommendations for minimizing disclosure risk while maximizing data utility in future censuses.

Full-Text Access | Supplementary Materials

Articles

“Gabriel Zucman: Winner of the 2023 Clark Medal,” by Emmanuel Saez

The 2023 John Bates Clark Medal of the American Economic Association was awarded to Gabriel Zucman, associate professor of economics at the University of California, Berkeley for his fundamental contributions to the study of inequality and taxation. Through meticulous empirical work and creative methodological approaches, he has revealed key trends about the concentration of global wealth, the size and distribution of tax evasion, and the tax-saving strategies of multinational companies. These findings have had a profound impact on the academic literature and on global policy debates. He has shifted the way economic research is done by showing that measurement can have a large impact in our field and on the world, inspiring many younger scholars to follow in his footsteps.

Full-Text Access | Supplementary Materials

Features

“Recommendations for Further Reading,” by Timothy Taylor

Full-Text Access | Supplementary Materials

Lawsuits are still pending, but the current schedule if for a congestion pricing scheme to begin in Manhattan on June 30. An online issue of Vital City published on May 1 has a group of short and readable explainer articles on aspects of the plan.

In the opening essay, Josh Greenman lays out the basics this way:

The congestion pricing plan has twin, closely related objectives: to reduce stubbornly high automobile traffic in Manhattan, and to raise at least $1 billion, and ideally more, in capital funding annually to support public transit. MTA officials expect the plan to reduce the number of vehicles entering the central business district by 17%. The program’s final details go like this: Cars will pay $15 to enter Manhattan at 61st Street and below during daytime hours (5 a.m. to 9 p.m.), and $3.75 during off-peak hours (9 p.m.-5 a.m. on weekdays, and 9 p.m. to 9 a.m. on weekends). At peak times, motorcycles will pay $7.50; small trucks and charter buses, $24; and large trucks and tour buses, $36. Ubers, Lyfts and for-hire vehicles will charge $2.50 per ride, and yellow taxis, $1.25 per ride. There will be no tollbooths: Automated license-plate-reading cameras at 110 locations will photograph vehicles’ license plates

There are of course a bunch of little exceptions, and if you want to dig deeper into details, read Greenman’s article. Here, I want to mention some of the issues that come up in other articles.

On Day 1 of the program, there will be extra charges and probably all kinds of practical problems, while any benefits of additional funds for mass transit will take time. This may not be a politically sustainable equilibrium. Howard Yaruss suggests offering an immediate carrot: as one example, make all of New York City mass transit free on Sundays.

At best, the congestion charge is only going to take a moderate bite out of Manhattan traffic. Sam Schwartz notes that in the decade up to 2019, the number of cars entering Manhattan’s central business district declined–and traffic congestion got worse. A substantial part of the problem was the rise in ride-share traffic, and if autonomous vehicles arrive in Manhattan, the congestion could worsen further.

New York has been using cameras that take a picture of license plates to enforce speeding laws, and there has been a large rise in the number of cars with license plates that are unreadable for many possible reasons: Buy a fake plate on eBay? Buy a legitimate paper license plate in states that allow it? Hang a bike rack over the license plate? For $100, buy an electronic gizmo that makes your plate unreadable to the camera? Use certain coatings or covers that makes a plate unreadable? Just slop some mud on the plate? Drive without a license plate? Reading license plates to collect the congestion toll will have problems, too.

The projected additional funding for NYC mass transit will increase its capital budget by a little less than 10%. More broadly, as funds become available from the congestion toll, what parts of the NYC mass transit system will see noticeable short-term benefits?

Traffic will reroute in creative ways to minimize or avoid the toll, creating new bottlenecks and issues. As one example, people may commute to upper Manhattan (outside the toll zone) or to other parts of New York City, avoid paying the toll, and then take mass transit the rest of the way. If cars are discouraged from commuting into Manhattan, it may be that trucks find it easier to drive into Manhattan. Fewer cars may also open up opportunities for lanes dedicated to buses, or to expanded walking and bike paths, or allow restaurants to keep serving outdoors.

Henry Grabar points to the interaction of congestion pricing and the rules that govern parking. In describing New York City, he writes:

The City manages 19,000 lane miles and 3 million parking spaces; streets make up an astounding 36% of Manhattan. The unthinking allocation of most of that space to private cars — those in motion, but in particular, those that are parked — has long presented one of the city’s greatest opportunities for improvement. … The city can resolve that issue by borrowing a technique from Vancouver: Issue low-cost permits to current car-owning residents, and give them and low-income households an option to renew at that rate in perpetuity. But after that initial period, start charging applicants a market price for a limited number of permits. Gradually, old-timers move away and the system transitions into one where street space is appropriately priced, and the city can easily weigh the distribution of new permits against other curb priorities in terms of space and money. It’s hard to take away parking privileges, but it’s easy not to grant them in the first place. 

Congestion pricing is a bundle of complexities, and a bundle of winners and losers. I don’t live in or near New York, so I’m delighted to watch the experiment play out from a distance. In addition, I’m not hearing a lot of other ideas that offer the possibility of reducing congestion and increasing mass transit in the city. But it also seems like the kind of idea that could be tripped up by practicalities.

For more on congestion pricing, see:

• “What if the Argument Was About Whether to Remove Congestion Pricing?” (May 24, 2019)
• “The Stockholm Congestion Charge” (May 2, 2018)
• “The Pricing Answer to Traffic Congestion” (July 17, 2017)